Weekly Round-up on Tax and Corporate Laws | 19th to 24th August 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from August 19^th to 24^th, 2024, namely:

1. All Indian citizens aren’t required to obtain an Income-tax Clearance Certificate before leaving the Country: CBDT;
2. Section 54G relief available even if new undertaking was set up in name of firm in which assessee was partner: ITAT;
3. HC set aside proceedings initiated under section 130 where stock of goods of assessee was found in excess during survey;
4. HC set aside order since E-way bill was produced before passing of seizure order;;
5. SEBI proposes faster rights issue by enabling allotment to ‘selective investors’ and
6. Accounting Treatment of Spectrum Charges, Promotional Expenses, and R&D Costs related to Project.

1. All Indian citizens aren’t required to obtain Income-tax Clearance Certificate before leaving Country: CBDT

Section 230(1A) of the Income Tax Act, 1961, relates to obtaining a tax clearance certificate by persons domiciled in India. The Finance (No. 2) Act 2024 has amended Section 230(1A) to include a reference to the Black Money(Undisclosed Foreign Income and Assets) and the Imposition of Tax Act 2015.

It was noticed that there was a mis-information about the said amendment emanating from incorrect interpretation of the amendment. It was being erroneously reported that all Indian citizens must obtain income-tax clearance certificate (ITCC) before leaving the country.

The Central Board of Direct Taxes (CBDT) has clarified that this position is factually incorrect. As per section 230 of the Act, every person is not required to obtain a tax clearance certificate. Only certain persons, in respect of whom circumstances exist, make it necessary to obtain ITCC.

The CBDT, vide its Instruction No. 1/2004, dated 05.02.2004, has specified that ITCC under Section 230(1A), may be required to be obtained by persons domiciled in India only in the following circumstances only after recording the reasons for the same and after taking approval from the Principal Chief Commissioner of Income-tax or Chief Commissioner of Income-tax:

• where the person is involved in serious financial irregularities and his presence is necessary for the investigation of cases under the Income-tax Act or the Wealth-tax Act, and it is likely that a tax demand will be raised against him, or
• where the person has direct tax arrears exceeding Rs. 10 lakh outstanding against him, which have not been stayed by any authority.

Accordingly, the CBDT stated that the ITCC, under Section 230(1A) of the Act, is needed by residents domiciled in India only in rare cases, such as

• where a person is involved in serious financial irregularities or
• where a tax demand of more than 10 lakh is pending, which is not stayed by any authority.

Read the Press Release

2. Section 54G relief available even if new undertaking was set up in name of firm in which assessee was partner: ITAT

The assessee was engaged in the business of manufacturing and job work of CI Casting, as a proprietor. While furnishing the return of income the assessee claimed deduction under section 54G on the ground that he had invested in a firm (new industrial undertaking in rural area) in which he was a partner and the said firm had invested the said amount in Factory Building and Plant & Machinery.

However, the Assessing Officer (AO) rejected the assessee’s contention and held that the assessee was an individual who shifted the undertaking from urban to rural areas to a partnership firm, which was a different entity under the Income Tax Act. Therefore, the AO made additions to the income of assessee and disallowed the assessee’s claim under section 54G.

On appeal, CIT(A) upheld the action of AO. Aggrieved by the order, the assessee filed an appeal to the Rajkot Tribunal.

The Tribunal held that the object of section 54G is to promote decongestion of urban areas and balanced regional growth. This section exempts capital gains on the transfer of plant, machinery, land, building, etc., used for the purpose of the business of industrial undertaking as a consequence of shifting the industrial undertaking from an urban area to a non-urban area. The capital gain would be exempt to the extent, it is utilized within a period of one year before or three years after the date of transfer.

The assessee has complied with and satisfied the following conditions, namely:

1. shifting the existing undertaking from urban to rural area,
2. transferring and installing the existing plant machinery, and other equipment in the rural area,
3. making investment in the new undertaking for expansion and investment in business,
4. MoU was made for expansion and investment in shifting the business, and
5. new investment in the firm was made in which the assessee was a partner. Therefore, the assessee had total right in the investment of the firm.

The firm name is only a compendious name given to the partnership for the sake of convenience. The firm’s assets belong to and are owned by the firm’s partners. Any property owned by it is really the property of the partners, and the use of the expression ‘firm’ is only a compendious mode to designate the persons who have agreed to a joint venture. What is called the property of the firm is really the property of the partners. The partnership property will vest in all the partners, and in that sense, every partner has an interest in the property of the partnership. The interest of a partner in a partnership firm belonged to him and would be includible in his ‘assets’ and will have to be taken into account while computing his net wealth.

The primary condition is that the assessee should have made an investment in the undertaking shifted to a rural area. Section 54G does not state that the asset should be acquired in the assessee’s name.

The assessee shifted the existing plant and machinery, along with all important business plans, goodwill to rural area and therefore the whole manufacturing undertaking has been shifted to rural area. Therefore, the assessee was eligible for exemption under section 54G.

Read the Ruling

3. HC set aside proceedings initiated under section 130 where stock of goods of assessee was found in excess during survey

The Honorable Allahabad High Court has recently held that even if excess stock is found during search proceedings initiated under Section 67; proceedings under section 130 cannot be initiated. This ruling is given in the case of Dinesh Kumar Pradeep Kumar v. Additional Commissioner Grade 2, State Tax.

Facts

The petitioner was engaged in the business of trading of Cement, Mauram and Saria. The business premises of petitioner was surveyed and only on the basis of eye measurement, it was held that the stock was excess and the goods were confiscated. Thereafter, notice was issued and the ex-parte impugned order was passed. It filed appeal against the said order but the same was also dismissed.

It filed a writ petition against the order and contended that the survey was made under Section 67; therefore, proceedings under Section 73 or 74 should have been initiated, and impugned proceedings under Section 130 were not permissible.

Held

The Honorable High Court noted that the survey was made under Section 67 of the GST Act, 2017. Even if excess stock is found, the proceedings under Section 130 of the CGST Act, 2017 cannot be initiated. In the instant case, the entire tax was determined, and the penalty was levied only on the basis of a survey by taking recourse under Section 130 of the CGST Act, 2017 and not taking recourse to Section 73/74. Therefore, the Court held that the impugned proceeding under Section 130 was not permissible and liable to be set aside.

Read the Ruling

4. HC set aside order since E-way bill was produced before passing of seizure order

The Honorable High Court of Allahabad has recently set aside the seizure order on the ground that the E-way bill was produced before the seizure order could be passed. The Court has also held that once the E-way bill was produced before the seizure order could be passed, it could not be said that the assessee had contravened any provision of the CGST Act. This ruling is given in Bans Steel v. State of U.P.

Facts

The petitioner was a retail and wholesale distributor of iron and steel. During transportation of goods, the vehicle was intercepted by the GST department and goods were detained on the ground that no E-way bill was found with regard to one of the invoices. Thereafter, the department issued a show cause notice and passed the impugned order imposing tax liability along with penalty.

The petitioner challenged the order in appeal, but the same was rejected. It filed writ petition and contended that the E-way bill was submitted before the passing of the seizure order. The department argued that there was a violation of the Act as E-way bill was not accompanying with the goods at the time of interception.

High Court

The Honorable High Court noted that the only ground for detention was that goods in question was not accompanying with proper documents and there was intention to avoid payment of tax. However, the E-way bill was produced before the seizure order could be passed and no discrepancy was pointed out in E-way bill by the department.

The Court further noted that the GST authorities have full mechanism as well as power that after detaining goods, if same was not accompanying with proper documents, authority could have made survey of business premises of assessee to find out correctness of transaction but authorities had chosen in their wisdom not doing so. Therefore, it was held that the impugned order was to be set aside as the discrepancy was cured by producing E-way bill before passing of the seizure order.

Read the Ruling

5. SEBI proposes faster rights issue by enabling allotment to ‘selective investors’

SEBI has issued a Consultation Paper dated August 20, 2024, on the Faster Rights Issue with the flexibility of allotment to selective investors. These proposed changes aim to enhance efficiency and accessibility, making Rights Issues more attractive by simplifying compliance, reducing timelines, and expanding investor options. The primary objective is to seek public comments on these proposals to enable faster Rights Issues with the flexibility of allotment to selective investors. Comments on these proposals may be submitted by September 10, 2024.  Some of the key proposals are as follows:

5.1 Proposal for discontinuation of requirement to file a ‘Draft Letter of Offer’ and ‘Letter of Offer’ with SEBI

 SEBI has proposed discontinuing the requirement to file a Draft Letter of Offer (DLoF) and Letter of Offer (LoF) with SEBI. Further, it has proposed to rationalise the content of the LoF by requiring disclosure of only the relevant information regarding the Rights Issue, such as the object of the issue, price, record date, entitlement ratio, etc. This change aims to make the Rights Issue more attractive to issuers by minimising delays and simplifying compliance.

5.2 Integration of Fast Track Rights Issue Disclosures into Simplified Letter of Offer

SEBI has proposed that issuers must disclose specific information in the simplified Letter of Offer (LoF). This includes details of non-compliance with the listing agreement or SEBI LODR Regulations over the three years immediately preceding the reference date. Further, issuers must disclose the percentage of investor complaints resolved by the end of the quarter before the reference date and the reasons if less than 95% were redressed. Incorporating these disclosures into the simplified Letter of Offer aims to enhance transparency and streamline the Rights Issue Process.

5.3 SEBI proposes reduction of Rights Issue process timeline to T+20 working days post-board approval

SEBI has proposed reducing the current timeline for the Rights Issue process to T+20 working days from the date of the board meeting approving the Rights Issue to the date of its closure. Further, it has been proposed that the timeline be reduced to T+3 working days from the date of closure of the Rights Issue to the date of listing/trading. The proposed reduction aims to accelerate the fundraising process, improve market efficiency, and provide companies with faster access to capital.

5.4 Relaxation of promoter renunciation norms and allotment of unsubscribed portions to ‘Selective Investors’

Current norms and regulations restrict promoters from renouncing their rights (except within the promoter group) if the issue hasn’t met the minimum subscription criteria or in the case of Fast Track Rights Issues. Additionally, Regulation 90(2) of the ICDR Regulations is unclear regarding the allotment of unsubscribed portions to anyone other than rights entitlement holders.

SEBI has now proposed to relax the restrictions on promoter renunciation, allowing the promoter/promoter group to renounce their rights entitlement in favour of selective investors. It is also proposed that the allotment of unsubscribed portions of the issue be allowed to select investors at the issuer’s discretion. This is expected to enhance flexibility in rights issues.

5.5 Removal of requirement for appointing a Merchant banker by an issuer and reassignment of duties in Rights Issue

SEBI has proposed eliminating the requirement for an issuer to appoint a merchant banker for Rights Issues. Further, SEBI has proposed assigning the activities currently undertaken by the merchant banker to the Issuer, Registrar to the Issue, and Stock Exchanges/Designated Stock Exchange (DSE). This aims to simplify the process, reduce costs and expedite the fundraising timeline.

5.6 Concurrent handling of application validation and allotment finalization by Stock Exchanges and Depositories

SEBI has proposed that stock exchanges and depositories concurrently validate applications and finalise the basis of allotment, tasks currently performed by the Registrar to the Issue. Further, stock exchanges and depositories will develop a system for real-time validation of applications within 6 months of implementing these proposals. This proposal could lead to quicker fund mobilisation and increased confidence among investors.

Conclusion

In conclusion, SEBI’s proposed reforms aim to modernize and streamline the Rights Issue process, improving efficiency and accessibility for issuers while enhancing investor protection. By aligning regulatory requirements, shortening timelines, and introducing greater flexibility, these changes are expected to make Rights Issue a more attractive fundraising option, ultimately contributing to a more transparent capital market.

Read the Consultation Paper

6. Accounting Treatment of Spectrum Charges, Promotional Expenses, and R&D Costs related to Project

When undertaking large-scale infrastructure projects, companies often incur various types of expenses essential for successful project completion, such as spectrum charges, promotional activities, and research and development (R&D) costs. Determining the correct accounting treatment for these expenditures—whether to capitalize them as part of the asset under construction or to expense them as incurred—is critical for accurate financial reporting. This decision directly impacts the company’s reported assets, liabilities, and profitability.

According to the relevant provisions of Ind AS 38, Intangible Assets, and Ind AS 16, Property, Plant, and Equipment, the treatment of these costs depends on their nature. Ind AS 38 defines an intangible asset as a non-physical asset expected to provide future economic benefits. While research costs cannot be capitalized, development costs may be, provided certain conditions are met. Ind AS 16 requires that expenses directly involved in preparing an asset for use should be capitalized, whereas costs unrelated to construction, like promotional activities, should be expensed.

In this regard, the Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI) opined that determining whether these costs should be capitalized or expensed depends on whether they directly contribute to creating a capital asset. Thus, spectrum charges that provide control and future economic benefits should be treated as intangible assets under Ind AS 38. The amortisation of this spectrum license during the construction phase can be capitalised as part of the project costs under Ind AS 16, as it directly contributes to the project’s development and operational readiness.

On the other hand, promotional expenses, being akin to advertising costs, should be expensed as incurred, as they do not directly relate to the physical construction or operational capability of the project. Similarly, R&D expenses in the research phase should be expensed when incurred, following Ind AS 38, as they do not guarantee future economic benefits.

For Example, ABC Limited incurred ₹80 crores up to 31st March 2022 for its high-speed rail project, including ₹40 crores in spectrum charges, ₹10 crores in promotional expenses, and ₹30 crores in research and development costs. Initially, the company capitalized all these expenses as part of Capital Work in Progress (CWIP). However, based on the EAC’s opinion, only the spectrum charges should be capitalized as an intangible asset, while the promotional and R&D expenses should be expensed in the period they were incurred, ensuring compliance with Ind AS 16 and Ind AS 38.

Read the Story